It’s a question that comes up at nearly dinner discussion of microfinance: why are the interest rates so high, and how can poor clients afford them? So, you have the answer – interest rates are high because operating in difficult environments is costly, and because those costs have to be recouped from small loans. After a few examples (it costs the same $10 to make a $100 and a $1000 loan…), you eventually set your questioner at ease that most MFIs might not be ripping off the poor after all. But after all that, you’ve largely forgotten then main point of the question – how can the poor afford it?
After reading yet another article questioning the affordability of microfinance loans, it occurred to me: microfinance clients face the same economics as the MFIs. Consider your typical market trader. She buys stock to resell. The cost of the stock, together with some fixed assets, constitutes her investment capital. What are her returns? I propose that they must be high as a matter of principle. More →
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